<PAGE> 1
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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended June 30, 1999
--------------------------
Commission File Number 0-18082
--------------------------
GREAT SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1524856
(IRS Employer Identification Number)
1451 E. BATTLEFIELD
SPRINGFIELD, MISSOURI
(Address of principal executive offices)
65804
(Zip Code)
(417) 887-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of each of the registrant's classes of
common stock: 7,571,469 shares of common stock, par value $.01, outstanding at
August 6, 1999.
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<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,037,711 $ 24,115,015
Interest-bearing deposits in other financial institutions. . . . . . . . . 1,539,948 9,431,407
----------- -----------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . 29,577,659 33,546,422
Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . 54,185,309 6,475,897
Held-to-maturity securities (fair value $34,531,000 - June 1999;
$49,287,000 - December 1998) . . . . . . . . . . . . . . . . . . . . . . 34,590,034 49,117,932
Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 730,805,784 708,238,463
Interest receivable:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,529,870 4,854,247
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498,097 651,993
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 4,101,762 6,571,841
Foreclosed assets held for sale, net . . . . . . . . . . . . . . . . . . . 907,343 2,810,201
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 9,741,617 10,012,125
Investment in Federal Home Loan Bank Stock . . . . . . . . . . . . . . . . 9,632,700 9,454,100
Excess of cost over fair value of net assets acquired, at amortized cost . 473,424 543,278
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,032,299 4,221,203
------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $884,075,898 $836,497,702
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $603,119,751 $597,624,994
Securities sold under repurchase agreements . . . . . . . . . . . . . . . 22,010,644 --
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 177,627,629 158,452,407
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,753,693 798,247
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . 4,545,839 5,356,558
Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . 1,089,278 1,582,298
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . 2,400,406 2,442,368
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,598,177 1,858,343
------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 817,145,417 768,115,215
------------ ------------
Capital stock
Serial preferred stock, $.01 par value; authorized 1,000,000 shares -- --
Common stock, $.01 par value; authorized 20,000,000 shares; issued
12,325,002 shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 123,250 123,250
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 17,376,828 17,224,451
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,210,142 90,459,992
Accumulated other comprehensive income:
Unrealized appreciation on available-for-sale securities,
net of income taxes of $104,342 at June 30, 1999
and $214,410 at December 31, 1998. . . . . . . . . . . . . . . . . . . . 160,107 335,359
. ----------- -----------
112,870,327 108,143,052
Less treasury common stock, at cost; June 30, 1999 - 4,737,794 shares;
December 31, 1998 - 4,522,323 shares . . . . . . . . . . . . . . . . . . (45,939,846) (39,760,565)
------------ ------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 66,930,481 68,382,487
------------ ------------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . $884,075,898 $836,497,702
============ ============
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 3
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $15,291,709 $14,880,797 $30,309,457 $29,658,710
Investment securities and other 940,516 1,151,862 1,847,077 2,231,949
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 16,232,225 16,032,659 32,156,534 31,890,659
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 5,915,520 5,455,856 11,940,945 10,556,062
FHLBank advances 2,108,296 2,534,884 4,223,109 5,228,676
Short-term borrowings 212,435 311,390 255,115 606,045
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 8,236,251 8,302,130 16,419,169 16,390,783
---------- ---------- ---------- ----------
NET INTEREST INCOME 7,995,974 7,730,529 15,737,365 15,499,876
PROVISION FOR LOAN LOSSES 573,590 585,790 1,150,000 1,000,215
---------- ----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,422,384 7,144,739 14,587,365 14,499,661
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Commissions 1,799,876 1,620,360 3,524,442 3,066,755
Service charge and ATM fees 1,080,991 1,132,184 2,080,481 2,087,309
Net realized gains on sales of loans 204,060 376,446 659,644 662,163
Net realized gains on available-for-sale securities 48,357 110,063 267,953 527,824
Income (expense) on foreclosed assets (130,323) (548) (173,831) (56,895)
Other income 781,310 307,160 1,340,389 629,341
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 3,784,271 3,545,665 7,699,078 6,916,497
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,208,652 2,846,374 6,473,166 5,601,381
Net occupancy and equipment expense 1,030,472 900,876 2,083,928 1,684,472
Postage 245,787 219,117 516,398 464,693
Insurance 149,917 140,396 323,633 285,713
Amortization of goodwill 39,927 33,261 79,854 65,410
Advertising 128,268 156,822 238,510 291,695
Office supplies and printing 211,067 168,042 497,670 342,891
Other operating expenses 1,267,172 896,814 2,079,084 1,849,902
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 6,281,262 5,361,702 12,292,243 10,586,157
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,925,393 5,328,702 9,994,200 10,830,001
PROVISION FOR INCOME TAXES 1,699,500 1,728,296 3,321,600 3,866,000
---------- ---------- ---------- ----------
NET INCOME $ 3,225,893 $ 3,600,406 $ 6,672,600 $ 6,964,001
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $.43 $.45 $.87 $.87
=== === === ===
DILUTED EARNINGS PER COMMON SHARE $.42 $.44 $.86 $.86
=== === === ===
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 4
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,672,600 $ 6,964,001
Items not requiring (providing) cash:
Depreciation 1,071,381 783,422
Amortization 79,854 55,410
Provision for loan losses 1,150,000 1,000,215
Provision for foreclosed asset losses -- 100,000
Gain on sale of loans (659,644) (668,353)
Proceeds from sales of loans held for sale 37,083,290 41,013,674
Originations of loans held for sale (33,034,346) (40,345,321)
Net realized gains on sale of available-for-sale securities (267,953) (524,908)
Loss on sale of premises and equipment 101,690 14,855
Gain on sale of foreclosed assets (897) (47,445)
Amortization of deferred income, premiums and discounts (505,297) (356,603)
Deferred income taxes 298,972 (140,586)
Changes in:
Accrued interest receivable (521,727) (978,185)
Prepaid expenses and other assets 2,460,079 (688,086)
Accounts payable and accrued expenses (852,681) (280,449)
Income taxes refundable/payable 1,739,834 (95,646)
----------- -----------
Net cash provided by operating activities 14,815,155 5,805,995
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (35,031,934) (34,381,914)
Purchase of additonal business units -- (135,000)
Purchase of premises and equipment (925,103) (1,878,377)
Proceeds from sale of premises and equipment 22,540 12,842
Proceeds from sale of foreclosed assets 346,000 396,840
Capitalized costs on foreclosed assets (16,815) (267,063)
Proceeds from maturing held-to-maturity securities 33,809,600 15,250,000
Purchase of held-to-maturity securities (9,367,313) (17,352,886)
Proceeds from sale of available-for-sale securities 17,030,009 979,195
Purchase of available-for-sale securities (64,665,997) (1,431,760)
(Purchase) redemption of FHLBank stock (178,600) 1,338,500
----------- -----------
Net cash used in investing activities (58,977,613) (37,469,623)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in certificates of deposit 32,685,216 45,515,532
Net increase (decrease) in checking and savings (27,190,459) 43,420,064
Proceeds from Federal Home Loan Bank advances 597,296,036 450,396,334
Repayments of Federal Home Loan Bank advances (578,120,814) (467,196,588)
Net increase in securities sold under repurchase agreements 22,010,644 --
Net increase (decrease) in short-term borrowings 1,955,446 (30,430,934)
Advances from borrowers for taxes and insurance (493,020) 1,249,036
Purchase of treasury stock (6,271,455) (2,939,723)
Dividends paid (1,933,926) (1,769,381)
Stock options exercised 256,027 91,642
----------- -----------
Net cash provided by financing activities 40,193,695 38,335,982
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,968,763) 6,672,354
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,546,422 39,158,884
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,577,659 $ 45,831,238
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 5
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Great Southern Bancorp, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements presented herein reflect all
adjustments, which are in the opinion of management, necessary for a fair
statement of the results for the periods presented. Operating results for the
three and six months ended June 30, 1999 and 1998 are not necessarily
indicative of the results that may be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the six month
transition period ended December 31, 1998. When necessary, reclassifications
have been made to prior period balances to conform to current period
presentation. These reclassifications had no effect on net income.
NOTE 2: OPERATING SEGMENTS
The Company's banking operation is its only reportable segment. The
banking operation segment is principally engaged in the business of
originating residential and commercial real estate loans, commercial business
and consumer loans and funding these loans through the attraction of deposits
from the general public, originating brokered deposits and borrowing from the
Federal Home Loan Bank and others. The operating results of this segment are
regularly reviewed by management to make decisions about resource allocations
and to assess performance.
The following table provides information about segment profits and
segment assets and has been prepared using the same accounting policies as
those described in Note 1. There are no material inter-segment revenues, thus
no reconciliations to amounts reported in the consolidated financial
statements are necessary. Revenue from segments below the reportable segment
threshold is attributable to four operating segments of the Company. These
segments include an insurance agency, a travel agency, discount brokerage
services and real estate appraisal services.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
---------------------------------------- ---------------------------------------
Banking All Other Totals Banking All Other Totals
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $16,152,288 $ 79,937 $16,232,225 $32,042,932 $ 113,602 $32,156,534
Non-interest income 1,967,115 1,817,156 3,784,271 3,893,738 3,805,340 7,699,078
Segment profit 2,945,069 280,824 3,225,893 5,980,150 692,450 6,672,600
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998
---------------------------------------- ---------------------------------------
Banking All Other Totals Banking All Other Totals
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $16,003,990 $ 28,669 $16,032,659 $31,827,251 $ 63,408 $31,890,659
Non-interest income 1,787,614 1,758,051 3,545,665 3,206,274 3,710,223 6,916,497
Segment profit 3,340,010 257,396 3,600,406 6,300,043 663,958 6,964,001
</TABLE>
<PAGE> 6
NOTE 3: COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity from
transactions and other events and circumstances from non-owner sources, and
excludes investments by and distributions to owners. Comprehensive income
includes net income and other items of comprehensive income meeting the above
criteria. The Company's only component of other comprehensive income is the
unrealized gains and losses on available for sale securities.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $3,225,893 $3,600,406 $6,672,600 $6,964,001
--------- --------- --------- ---------
Unrealized holding gains (losses),
net of income taxes 189,822 (69,655) (1,083) (188,372)
Less: reclassification adjustment
for gains included in net income,
net of income taxes (31,432) (71,541) (174,169) (343,086)
--------- --------- --------- ---------
158,390 (141,196) (175,252) (531,458)
--------- --------- --------- ---------
Other comprehensive income $3,384,283 $3,459,210 $6,497,348 $6,432,543
========= ========= ========= =========
</TABLE>
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Forward-Looking Statements
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or
phrases "will likely result" "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including, among other things, changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to advise readers that the factors listed above
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
The Company does not undertake-and specifically declines any obligation-
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
<PAGE> 7
General
The following should be read in conjunction with management's discussion
and analysis in the Company's December 31, 1998 Form 10-K.
The profitability of the Company, and more specifically, the
profitability of its primary subsidiary Great Southern Bank (the "Bank"),
depends primarily on its net interest income. Net interest income is the
difference between the interest income it earns on its loans and investment
portfolio, and its cost of funds, which consists mainly of interest paid on
deposits and borrowings. Net interest income is affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on these balances. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.
The Company's profitability is also affected by the level of its non-
interest income and operating expenses. Non-interest income consists
primarily of gains on sales of loans and available-for-sale investments,
service charge fees and commissions. Operating expenses consist primarily of
salaries and employee benefits, occupancy-related expenses, equipment and
technology-related expenses and other general operating expenses.
The operations of the Bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary
and fiscal policies of regulatory agencies. Deposit flows and the cost of
funds are influenced by interest rates on competing investments and general
market rates of interest. Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn are affected by
the interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds.
Effect of Federal Laws and Regulations
Federal legislation and regulation significantly affect the banking
operations of the Company and the Bank, and have increased competition among
savings institutions, commercial banks, mortgage banking enterprises and other
financial institutions. In particular, the capital requirements and
operations of regulated depository institutions such as the Company and the
Bank have been and will be subject to changes in applicable statutes and
regulations from time to time, which changes could, under certain
circumstances, adversely affect the Company or the Bank.
Potential Impact of Accounting Principles to be Implemented in the Future
The FASB recently adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
effective date of SFAS No. 133 has been delayed by SFAS 137 until fiscal years
beginning after June 15, 2000, but may be implemented early as of the
beginning of any fiscal quarter after issuance. SFAS No. 133 may not be
applied retroactively. Management does not believe adopting SFAS No. 133 will
have a material impact on the Company's financial statements.
<PAGE> 8
YEAR 2000 ISSUES
The year 2000 issue confronting the Company and its suppliers, customers
and competitors, centers on the inability of computer systems to recognize the
year 2000. Many existing computer programs and systems were originally
programmed with six digit dates that provided only two digits to identify the
calendar year in the date field. With the impending new millennium, these
programs and computers may recognize "00" as the year 1900 rather than the
year 2000.
Financial institution regulators have increased their focus upon year
2000 compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The FDIC and the other
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any year 2000 problems. The federal banking agencies have
asserted that year 2000 testing and certification is a key safety and
soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the year 2000 issue could
result in supervisory action, including such enforcement actions as the
reduction of the institution's supervisory ratings, the denial of applications
for approval of a merger or acquisition, or the imposition of civil money
penalties.
The Bank has experienced rapid growth in both the deposit and loan areas
in recent years. Management of the Bank evaluated the need to upgrade the
mission critical systems and determined conversion to a new hardware and
software system was the best solution to meet the growth needs of the Bank, as
well as to resolve the year 2000 issues. During the six months ended December
31, 1998, the Bank completed the conversion to the Jack Henry Silverlake
system for its core processing system and internal financial reporting system.
The new system has been certified year 2000 compliant, was tested by the Bank
for year 2000 compliance in early 1999 and is believed to be year 2000
compliant. As an integral part of upgrading the core system, the Company has
also been in a program of replacing its personal computers and wide area
networks with systems believed to be year 2000 compliant systems. This
program was also completed during the six months ended December 31, 1998.
A complete inventory of non-mission critical hardware and software was
completed in December 1997. Non-compliant software systems are scheduled for
replacement or will be discontinued. Security systems, elevators, heating and
air conditioning and like items have been tested and are expected to function
as usual through the date of change. Third party vendors deemed appropriate
will continue to be used and have indicated their products as compliant.
Testing of these and certain other systems was completed by June 30, 1999.
A budget of $2.4 million was established for the Bank to complete the
necessary steps previously noted. The majority of this amount has been spent
to date, with only a small amount of these costs being expensed in the six
months ended June 30, 1999. The remaining amount spent to date has either
been expensed previously or has been capitalized and is being amortized over a
3 to 5 year period. Management feels these expenses will not have a material
impact on the financial condition of the Company.
An outside consultant has been utilized throughout the process to provide
an independent review of all areas. The Company's estimate of year 2000
project costs and completion dates are based on management's best estimates
that have been derived utilizing numerous assumptions about future events.
These estimates and actual results may differ materially.
<PAGE> 9
The insurance, investment and travel subsidiaries operate on separate
computer systems from the Bank and each other. The Year 2000 Committee of the
Bank has been assisting these companies in performing a risk assessment of
their systems and taking the steps believed necessary to achieve compliance
with all year 2000 issues before December 31, 1999.
The Company believes it has completed the majority of the actions
necessary to achieve Year 2000 compliance for its core systems and the
majority of the work necessary to achieve overall compliance. While the
Company believes that its systems and technology will be compliant on January
2000 and thereafter, it faces an unquantifiable risk that third parties such
as customers will encounter year 2000 problems that cause them to reduce their
use of bank services, default on loans, or reduce levels of future borrowings.
There is also a risk that other financial organizations that the Company
maintains relations with could experience year 2000 issues that would
adversely affect the Company. Finally, if other service providers, such as
public utilities or telephone companies, are not year 2000 compliant, the
Company could experience service interruptions that would make the conduct of
business difficult.
The Company has developed a contingency plan to address some of these
uncertainties. It may employ back-up generators as needed to provide electric
power beginning January 1, 2000. It plans to have in place a cellular based
modern communications system at key branches to maintain communication with
its data service location in the event that landline communications are
disrupted. Immediately before the change of the century, electronic trial
balances with extended information are to be downloaded for import into local
database systems. A backup of all files considered pertinent will be
performed before the century change, and critical information is expected to
be printed in hard copy. The Company anticipates taking other steps to assure
both liquidity and security.
Asset and Liability Management
During the six months ended June 30, 1999, total assets increased by $48
million to $884 million. Available-for-sale securities increased $47.7
million and loans increased $22.6 million offset by a decline in held-to-
maturity securities of $14.5 million and a decline in foreclosed assets of
$1.9 million.
Total liabilities increased $49 million to $817 million. Deposits
increased $5.5 million, securities sold under repurchase agreements (a new
category of liabilities for the Company) increased $22 million and Federal
Home Loan Bank ("FHLBank") advances increased $19.1 million. The deposit
increase was actually greater as the December 31, 1998 balance included a
portion of the accounts now classified as securities sold under repurchase
agreements. The deposit increase was primarily from brokered deposits. The
increase in FHLBank advances was used to fund the increase in securities.
Management continues to feel that FHLBank advances and brokered deposits are
viable alternatives to retail deposits when factoring all the costs associated
with the generation and maintenance of retail deposits.
<PAGE> 10
Stockholders' equity decreased $1.5 million primarily as a result of net
treasury stock purchases of $6.2 million and dividend declarations and
payments of $1.9 million, offset by an increase in unrealized gains on
available-for-sale securities of $158,000 and net income of $6.7 million. The
Company repurchased 260,440 shares of common stock at an average price of
$24.08 per share during the six months ended June 30, 1999 and reissued 44,969
shares of treasury stock at an average price of $5.52 per share to cover stock
option exercises.
Interest Rate Sensitivity
A principal operating objective of the Company is to produce stable
earnings by achieving a favorable interest rate spread that can be sustained
during fluctuations in prevailing interest rates. The Company has sought to
reduce its exposure to adverse changes in interest rates by attempting to
achieve a closer match between the periods in which its interest-bearing
liabilities and interest-earning assets can be expected to reprice through the
origination of adjustable-rate mortgages and loans with shorter terms and the
purchase of other shorter term interest-earning assets.
The term "interest rate sensitivity" refers to those assets and
liabilities that mature within a stated period or reprice within that period
in response to fluctuations in market rates and yields. As noted above, one
of the principal goals of the Company's asset/liability program is to maintain
and match the interest rate sensitivity characteristics of the asset and
liability portfolios.
In order to properly manage interest rate risk, the Bank's Board of
Directors has established an Asset/Liability Management Committee ("ALCO")
made up of members of management to monitor the difference between the Bank's
maturing and repricing assets and liabilities and to develop and implement
strategies to decrease the "gap" between the two. The primary
responsibilities of the committee are to assess the Bank's asset/liability
mix, recommend strategies to the Board that will enhance income while managing
the Bank's vulnerability to changes in interest rates and report to the Board
the results of the strategies used. The Company's experience with interest
rates are discussed in more detail under the heading "Results of Operations
and Comparisons of the Three and Six Months Ended June 30, 1999 and 1998."
An important element of both earnings performance and liquidity is
management of interest rate sensitivity. Interest rate sensitivity reflects
the potential effect on net interest income of a movement in interest rates.
The difference between the Company's interest-sensitive assets and interest-
sensitive liabilities for a specified time frame is referred to as "gap." A
financial institution is considered to be asset-sensitive, or having a
positive gap, when the amount of its earning assets maturing or repricing
within a given time period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period. Conversely, a
financial institution is considered to be liability-sensitive, or have a
negative gap, when the amount of its interest-bearing liabilities maturing or
repricing within a given period exceeds the amount of earning assets also
maturing or repricing within that time period. During a period of rising
interest rates, a positive gap would tend to increase net interest income,
while a negative gap would tend to have an adverse effect on net interest
income. During a period of falling interest rates, a positive gap would tend
to have an adverse effect on net interest income, while a negative gap would
tend to increase net interest income.
<PAGE> 11
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation, funding sources and the pricing of
each, and off-balance sheet commitments in order to decrease sensitivity risk.
These guidelines are based upon management's outlook regarding future interest
rate movements, the state of the regional and national economy and other
financial and business risk factors. The Bank uses a static gap model and a
computer simulation to measure the effect on net interest income of various
interest rate scenarios over selected time periods. The Company's gap can be
managed by repricing assets or liabilities, selling available-for-sale
investments, replacing an asset or liability prior to maturity or adjusting
the interest rate during the life of an asset or liability. Matching the
amount of assets and liabilities repricing during the same time interval helps
to reduce the risk and minimize the impact on net interest income in periods
of rising or falling interest rates.
As a part of its asset and liability management strategy, the Company has
increased its investment in loans which are interest rate sensitive by
emphasizing the origination of adjustable-rate, one- to four-family
residential loans and adjustable-rate or relatively short-term commercial
business and consumer loans, and originating fixed-rate, one- to four-family
residential loans primarily for immediate resale in the secondary market.
Approximately one-third of total assets are currently invested in commercial
real estate and commercial business loans. This part of the strategy was
designed to improve asset yield and fee income, and to shorten the average
maturity and increase the interest rate sensitivity of the loan portfolio.
While efforts to date have contributed to the changes in the one-year interest
rate sensitivity gap and increased net interest income, such lending,
commensurate with the increased risk levels, has also resulted in an increase
in the level of non-performing assets. Management continually evaluates
existing and potential commercial real estate and commercial business loans,
in order to try to reduce undesirable risks including concentrations in a
given geographic area or a particular loan category.
Interest rate risk exposure estimates (the sensitivity gap) are not exact
measures of an institution's actual interest rate risk. They are only
indicators of interest rate risk exposure produced in a simplified modeling
environment designed to allow management to gauge the Company's sensitivity to
changes in interest rates. They do not necessarily indicate the impact of
general interest rate movements on the Company's net interest income because
the repricing of certain categories of assets and liabilities is subject to
competitive and other factors beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and in
different amounts and would therefore cause a change (which potentially could
be material) in the Company's interest rate risk.
<PAGE> 12
RESULTS OF OPERATIONS AND COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE
30, 1999 and 1998
The decrease in earnings of $374,000, or 10.4%, for the three months
ended June 30, 1999 when compared to the same period in 1998, was primarily
due to an increase in non-interest expense of $919,000, or 17.1%, offset by an
increase in net interest income of $265,000, or 3.4%, and an increase in non-
interest income of $239,000, or 6.7%, during the three month period.
The decrease in earnings of $291,000, or 4.2%, for the six months ended
June 30, 1999 when compared to the same period in 1998, was primarily due to
an increase in non-interest expense of $1.7 million, or 16.1%, offset by an
increase in net interest income of $237,000, or 1.5%, and an increase in non-
interest income of $783,000, or 11.3%, during the six month period.
Total Interest Income
Total interest income increased $200,000, or 1.2%, during the three
months ended June 30, 1999, when compared to the three months ended June 30,
1998. The increase was due to a $411,000, or 2.8%, increase in interest
income on loans offset by a $211,000, or 18.3% decrease in interest income on
investments and other interest earning assets.
Total interest income increased $266,000, or .8%, during the six months
ended June 30, 1999, when compared to the six months ended June 30, 1998. The
increase was due to a $650,000, or 2.2%, increase in interest income on loans
offset by a $385,000, or 17.2% decrease in interest income on investments and
other interest earning assets.
Interest Income - Loans
During the three months ended June 30, 1999, interest income on loans
increased from higher average balances offset by a decline in average rates.
Interest income increased $1.2 million as the result of higher average loan
balances from $656 million during the three months ended June 30, 1998 to $726
million during the three months ended June 30, 1999. The higher average
balance resulted from the Bank's increase in commercial real estate and
commercial business lending and the indirect dealer consumer lending offset by
a decline in single-family residential lending. Interest income decreased
$829,000 as the result of lower average rates from 9.07% during the three
months ended June 30, 1998 to 8.42% during the three months ended June 30,
1999. Changes in rates were due to market rate reductions partially offset by
an increased percentage of the portfolio in higher yielding assets.
During the six months ended June 30, 1999, interest income on loans
increased from higher average balances offset by a decline in average rates.
Interest income increased $2.4 million as the result of higher average loan
balances from $647 million during the six months ended June 30, 1998 to $723
million during the six months ended June 30, 1999. The higher average balance
resulted from the Bank's increase in commercial real estate and commercial
business lending and the indirect dealer consumer lending offset by a decline
in single-family residential lending. Interest income decreased $1.7 million
as the result of lower average rates from 9.17% during the six months ended
June 30, 1998 to 8.39% during the six months ended June 30, 1999.
<PAGE> 13
Interest Income - Investments and Other Interest-Earning Deposits
Interest income on investments and other interest-earning deposits
decreased from lower average balances offset by higher average yields during
the three months ended June 30, 1999 when compared to the three months ended
June 30, 1998. Interest income decreased $428,000 as a result of lower
average balances from $97 million during the three months ended June 30, 1998
to $69 million during the three months ended June 30, 1999. This decrease was
primarily in interest-bearing deposits in FHLBank used to fund daily
operations and lending. Interest income increased $217,000 as a result of
higher average yields from 4.77% during the three months ended June 30, 1998,
to 5.46% during the three months ended June 30, 1999 due to higher short term
market rates.
Interest income on investments and other interest-earning deposits
decreased from lower average balances offset by higher average yields during
the six months ended June 30, 1999 when compared to the six months ended June
30, 1998. Interest income decreased $952,000 as a result of lower average
balances from $95 million during the six months ended June 30, 1998 to $67
million during the six months ended June 30, 1999. This decrease was
primarily in interest-bearing deposits in FHLBank used to fund daily
operations and lending. Interest income increased $567,000 as a result of
higher average yields from 4.70% during the six months ended June 30, 1998, to
5.53% during the six months ended June 30, 1999 due to higher short term
market rates.
Total Interest Expense
Total interest expense decreased $66,000, or .8%, during the three months
ended June 30, 1999 when compared with the same period in 1998. The decrease
during the three month period was primarily due to a $526,000, or 18.5%,
decrease in interest expense on FHLBank advances and other borrowings offset
by a $460,000, or 8.4%, increase in interest expense on deposits.
Total interest expense increased $28,000, or .2%, during the six months
ended June 30, 1999 when compared with the same period in 1998. The increase
during the six month period was primarily due to a $1.4 million, or 13.1%,
increase in interest expense on deposits offset by a $1.4 million, or 23.3%,
decrease in interest expense on FHLBank advances and other borrowings.
Interest Expense - Deposits
Interest expense on deposits increased $718,000 as a result of higher
average balances of time deposits from $330 million during the three months
ended June 30, 1998, to $387 million during the three months ended June 30,
1999 and $206,000 due to higher average balances of interest-bearing demand
deposits from $129 million during the three months ended June 30, 1998, to
$151 million during the three months ended June 30, 1999. The average
balances on time deposits increased as a result of the Company's use of
brokered deposits and the average balances on interest-bearing demand deposits
increased as a result of reclassifications to this category beginning June 30,
1998. Interest on time deposits decreased $230,000 due to lower rates from
5.54% during the three months ended June 30, 1998 to 5.24% during the three
months ended June 30, 1999 and interest on interest-bearing demand deposits
decreased $260,000 due to lower rates from 2.05% during the three months ended
June 30, 1998 to 1.61% during the three months ended June 30, 1999. The other
deposit category, savings, experienced only minor changes.
<PAGE> 14
Interest expense on deposits increased $1.6 million as a result of higher
average balances of time deposits from $319 million during the six months
ended June 30, 1998, to $382 million during the six months ended June 30, 1999
and $271,000 due to higher average balances of interest-bearing demand
deposits from $124 million during the six months ended June 30, 1998, to $154
million during the six months ended June 30, 1999. The average balances on
time deposits increased as a result of the Company's use of brokered deposits
and the average balances on interest-bearing demand deposits increased as a
result of reclassifications to this category beginning June 30, 1998.
Interest on time deposits decreased $445,000 due to lower rates from 5.55%
during the six months ended June 30, 1998 to 5.25% during the six months ended
June 30, 1999 and interest on interest-bearing demand deposits decreased
$94,000 due to lower rates from 2.08% during the six months ended June 30,
1998 to 1.91% during the six months ended June 30, 1999. The other deposit
category, savings, experienced only minor changes.
Interest Expense - FHLBank Advances and Other Borrowings
Interest expense on FHLBank advances and other borrowings decreased
$648,000 due to lower average balances from $201 million in the three months
ended June 30, 1998 to $158 million in the three months ended June 30, 1999
offset by an increase of $122,000 due to higher average rates from 5.64% in
the three months ended June 30, 1998 to 5.89% during the three months ended
June 30, 1999. The average balances decreased primarily as a result of the
Company's increased use of brokered deposits. The average rates increased as
the result of reduction of lower rate short-term advances.
Interest expense on FHLBank advances and other borrowings decreased $1.5
million due to lower average balances from $207 million in the six months
ended June 30, 1998 to $155 million in the six months ended June 30, 1999
offset by an increase of $120,000 due to higher average rates from 5.65% in
the six months ended June 30, 1998 to 5.76% during the six months ended June
30, 1999. The average balances decreased primarily as a result of the
Company's increased use of brokered deposits and the average rates increased
as the result of the reduction of lower rate short-term advances.
Net Interest Income
The Company's overall interest rate spread decreased 9 basis points, or
2.4%, from 3.74% during the three months ended June 30, 1998, to 3.65% during
the three months ended June 30, 1999. The decrease was due to a 34 basis
point decline in the weighted average yields received on interest-earning
assets partially offset by a 25 basis point decrease in the weighted average
rates paid on interest-bearing liabilities.
The Company's overall interest rate spread decreased 19 basis points, or
5%, from 3.81% during the six months ended June 30, 1998, to 3.62% during the
six months ended June 30, 1999. The decrease was due to a 45 basis point
decline in the weighted average yields received on interest-earning assets
partially offset by a 26 basis point decrease in the weighted average rates
paid on interest-bearing liabilities.
Prime averaged 8.5% during the three and six months ended June 30, 1998
compared to an average of 7.75% (75 basis points less) during the three and
six months ended June 30, 1999. As a large percentage of the Company's loans
are tied in some form or another to prime, this reduction was the primary
reason for the decline in the weighted average yields received on interest-
earning assets.
<PAGE> 15
Interest rates paid on deposits declined during the three and six months
ended June 30, 1999 compared to the same periods one year earlier. However,
as the Company has grown the assets of the Bank, the brokered and other time
deposits needed to fund that growth have increased the average cost of
deposits since time deposits are higher cost deposits for the Bank than are
interest-bearing demand and savings.
Interest rates paid on FHLBank advances and other borrowings increased
during the three and six months ended June 30, 1999 compared to the same
periods one year earlier primarily due to the reduction in average balances in
the shorter maturities that carry lower rates than longer maturity advances
retained.
Provision for Loan Losses
The provision for loan losses decreased from $586,000 during the three
months ended June 30, 1998 to $574,000 during the three months ended June 30,
1999, and increased from $1 million during the six months ended June 30, 1998
to $1.2 million during the six months ended June 30, 1999.
Management records a provision for loan losses in an amount sufficient to
result in an allowance for loan losses that will cover current net charge-offs
as well as risks believed to be inherent in the loan portfolio of the Bank.
The amount of provision charged against current income is based on several
factors, including, but not limited to, past loss experience, current portfolio
mix, actual and potential losses identified in the loan portfolio, economic
conditions and regular reviews by internal staff and regulatory examinations.
Weak economic conditions, higher inflation or interest rates, or other
factors may lead to increased losses in the portfolio. Management has
established various controls in an attempt to limit future losses, such as a
watch list of possible problem loans, documented loan administration policies
and a loan review staff to review the quality and anticipated collectibility of
the portfolio. Management determines which loans are potentially
uncollectible, or represent a greater risk of loss and makes additional
provisions to expense, if necessary, to maintain the allowance at a
satisfactory level.
Non-performing assets decreased $2 million during the six months ended
June 30, 1999 from $12.9 million at December 31, 1998 to $10.9 million at June
30, 1999. Non-performing loans decreased $100,000, or 1%, from $10.1 million
at December 31, 1998 to $10 million at June 30, 1999, and foreclosed assets
decreased $1.9 million, or 67.9%, from $2.8 million at December 31, 1998 to
$900,000 at June 30, 1999 primarily due to the sale of two large properties.
Potential problem loans decreased $800,000 during the six months ended
June 30, 1999 from $12.2 million at December 31, 1998 to $11.4 million at June
30, 1999. These are loans which management has identified through routine
internal review procedures as having possible credit problems which may cause
the borrowers difficulty in complying with current loan repayment terms.
These loans are not reflected in the non-performing loans.
Management considers the allowance for loan losses and the allowance for
foreclosed asset losses adequate to cover losses inherent in the Company's
assets at this time, based on current economic conditions. If economic
conditions deteriorate significantly, it is possible that additional assets
would be classified as non-performing, and accordingly, additional provision
for losses would be required, thereby adversely affecting future results of
operations and financial condition.
<PAGE> 16
Non-interest Income
Non-interest income increased $239,000, or 6.7%, in the three months
ended June 30, 1999 when compared to the same period in 1998. The increase
was primarily due to: (i) an increase in commission income of $180,000, or
11%, from increased sales in the travel, insurance and investment
subsidiaries; (ii) a decrease in net realized gains on sales of fixed rate
residential loans of $172,000, or 46%; (iii) a decrease of $62,000, or 56%, in
profits on sale of available-for-sale securities; (iv) an increase of $130,000
in expenses on foreclosed assets; and (v) various increases or decreases in
other non-interest income items.
Non-interest income increased $783,000, or 11.3%, in the six months ended
June 30, 1999 when compared to the same period in 1998. The increase was
primarily due to: (i) an increase in commission income of $457,000, or 15%,
from increased sales in the travel, insurance and investment subsidiaries;
(ii) a decrease of $260,000, or 49%, in profits on sale of available-for-sale
securities; (iii) an increase of $117,000 in expenses on foreclosed assets;
and (iv) various increases or decreases in other non-interest income items.
Non-interest Expense
Non-interest expense increased $919,000, or 17.1%, in the three months
ended June 30, 1999 when compared to the same period in 1998. The increase
was primarily due to: (i) an increase of $363,000, or 12.8%, in salary and
employee related costs due to increased staffing levels resulting from
asset/customer growth and additional staffing required by the Bank's core
computer conversion and Y2K testing; (ii) an increase of $129,000, or 14.3%,
in occupancy and equipment expense due to the core computer conversion, Y2K
testing and other technology related purchases; and (iii) increases or
decreases in other non-interest expense items.
Non-interest expense increased $1.7 million, or 16.1%, in the six months
ended June 30, 1999 when compared to the same period in 1998. The increase
was primarily due to: (i) an increase of $872,000, or 15.6%, in salary and
employee related costs due to increased staffing levels resulting from
asset/customer growth and additional staffing required by the Bank's core
computer conversion and Y2K testing; (ii) an increase of $400,000, or 23.8%,
in occupancy and equipment expense due to the core computer conversion, Y2K
testing and other technology related purchases; (iii) an increase of $155,000,
or 45.2% in office supplies and printing due to growth; and (iv) increases or
decreases in other non-interest expense items.
In conjunction with the Company's recent growth and the Year 2000 issue
discussed previously in this document, the Company may be incurring additional
operating costs associated with the implementation and operation of new
mainframe hardware and software as well as possible other replacement computer
and equipment items. In addition, it is probable that the insurance,
investment and travel subsidiaries will incur costs in the evaluation,
purchase, implementation and operation of their systems to bring them into
compliance to avoid potential Year 2000 issues. While the exact impact of the
cost to correct or convert the various systems of the Company is not known at
this time, management does not feel it will be material to the overall
operations or financial condition of the Company.
<PAGE> 17
Provision for Income Taxes
Provision for income taxes as a percentage of pre-tax income increased
from 32.4% in the three months ended June 30, 1998 to 34.5% in the three
months ended June 30, 1999.
Provision for income taxes as a percentage of pre-tax income decreased
from 35.7% in the six months ended June 30, 1998 to 33.2% in the six months
ended June 30, 1999. The lower percentage in the June 30, 1999 period was
primarily due to lower state franchise and income taxes as a result of the
organization by the Company of a Real Estate Investment Trust in July 1998.
Average Balances, Interest Rates and Yields
The following tables present for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, and the net interest margin.
The tables do not include non-interest-bearing demand deposits and do not
reflect any effect of income taxes.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------
1999 1998
--------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $726,087 $15,291 8.42% $656,473 $14,881 9.07%
Investment securities and other
interest-earning assets 68,883 941 5.46 96,610 1,152 4.77
------- ------ ---- ------- ------- ----
Total interest-earning assets $794,970 16,232 8.17 $753,083 16,033 8.52
======= ------ ---- ======= ------ ----
Interest-bearing liabilities:
Demand deposits $151,307 610 1.61 $129,274 664 2.05
Savings deposits 33,061 240 2.90 34,790 214 2.46
Time deposits 386,809 5,066 5.24 330,407 4,578 5.54
------- ----- ---- ------- ----- ----
Total deposits 571,177 5,916 4.14 494,471 5,456 4.41
FHLBank advances and other borrowings 157,502 2,320 5.89 201,089 2,989 5.64
------- ----- ---- ------- ----- ----
Total interest-bearing liabilities $728,679 8,236 4.52 $695,560 8,302 4.77
======= ----- ---- ======= ----- ----
Net interest income:
Interest rate spread $7,996 3.65% $7,731 3.74%
===== ==== ===== ====
Net interest margin(1) 4.02% 4.11%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 109.1% 108.3%
===== =====
<FN>
(1) Defined as the Company's net interest income divided by total interest-earning assets.
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
1999 1998
--------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- --------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $722,586 $30,309 8.39% $646,539 $29,659 9.17%
Investment securities and other
interest-earning assets 66,854 1,847 5.53 95,069 2,232 4.70
------- ------- ---- ------- ------- ----
Total interest-earning assets $789,440 32,156 8.15 $741,608 31,891 8.60
======= ------- ---- ======= ------ ----
Interest-bearing liabilities:
Demand deposits $153,792 1,466 1.91 $123,842 1,289 2.08
Savings deposits 33,008 440 2.67 34,649 424 2.45
Time deposits 382,465 10,035 5.25 318,717 8,843 5.55
------- ------ ---- ------- ----- ----
Total deposits 569,265 11,941 4.20 477,208 10,556 4.42
FHLBank advances and other borrowings 155,395 4,478 5.76 206,575 5,835 5.65
------- ------ ---- ------- ----- ----
Total interest-bearing liabilities $724,660 16,419 4.53 $683,783 16,391 4.79
======= ------ ---- ======= ----- ----
Net interest income:
Interest rate spread $15,737 3.62% $15,500 3.81%
====== ==== ===== ====
Net interest margin(1) 3.99% 4.18%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 108.9% 108.5%
===== =====
<FN>
(1) Defined as the Company's net interest income divided by total interest-earning assets.
</TABLE>
<PAGE> 19
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities for the periods shown. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in rate (i.e., changes in rate
multiplied by old volume) and (ii) changes in volume (i.e., changes in volume
multiplied by old rate). For purposes of this table, changes attributable to
both rate and volume which cannot be segregated have been allocated
proportionately to volume and to rate.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 vs. 1998 1999 vs. 1998
------------------------------- ------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------- Increase ----------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
-------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ (829) $1,239 $ 410 $(1,740) $2,390 $ 650
Investment securities and
other interest-earning assets 217 (428) (211) 567 (952) (385)
----- ----- ----- ----- ----- -----
Total interest-earning assets (612) 811 199 (1,173) 1,438 265
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Demand deposits (260) 206 (54) (94) 271 177
Savings deposits 36 (10) 26 34 (18) 16
Time deposits (230) 718 488 (445) 1,637 1,192
----- ----- ----- ----- ----- -----
Total deposits (454) 914 460 (505) 1,890 1,385
FHLBank advances and other borrowings 122 (648) (526) 120 (1,477) (1,357)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities (332) 266 (66) (385) 413 28
----- ----- ----- ----- ----- -----
Net interest income $ (280) $ 545 $ 265 $ (788) $1,025 $ 237
===== ===== ===== ===== ===== =====
</TABLE>
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to generate sufficient
cash to meet present and future financial obligations in a timely manner
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. These obligations include the
credit needs of customers, funding deposit withdrawals, and the day-to-day
operations of the Company. Liquid assets include cash, interest-bearing
deposits with financial institutions and certain investment securities and
loans. As a result of the Company's management of the ability to generate
liquidity primarily through liability funding, management believes that the
Company maintains overall liquidity sufficient to satisfy its depositors'
requirements and meet its customers' credit needs. At June 30, 1999, the
Company had commitments of approximately $119 million to fund loan
originations, issued lines of credit, outstanding letters of credit and
unadvanced loans.
Management continuously reviews the capital position of the Company and
the Bank to insure compliance with minimum regulatory requirements, as well as
to explore ways to increase capital either by retained earnings or other
means.
<PAGE> 20
The Company's capital position remained strong, with stockholders' equity
at $66.9 million, or 7.6% of total assets of $884 million at June 30, 1999
compared to equity at $68.4 million, or 8.2%, of total assets of $836 million
at December 31, 1998.
Banks are required to maintain minimum risk-based capital ratios. These
ratios compare capital, as defined by the risk-based regulations, to assets
adjusted for their relative risk as defined by the regulations. Guidelines
required banks to have a minimum Tier 1 capital ratio, as defined, of 4.00%
and a minimum Tier 2 capital ratio of 8.00%, and a minimum leverage capital
ratio of 4.00%. On June 30, 1999, the Bank's Tier 1 capital ratio was 8.8%,
Tier 2 capital ratio was 10% and leverage capital ratio was 6.8%.
At June 30, 1999, the held-to-maturity investment portfolio included
$56,000 of gross unrealized gains and $115,000 of gross unrealized losses.
The unrealized gains and losses are not expected to have a material effect on
future earnings beyond the usual amortization of acquisition premium or
accretion of discount because no sale of the held-to-maturity investment
portfolio is foreseen.
The Company's primary sources of funds are savings deposits, FHLBank
advances, other borrowings, loan repayments, proceeds from sales of loans and
securities and funds provided from operations. The Company utilizes
particular sources of funds based on the comparative costs and availability at
the time. The Company has from time to time chosen not to pay rates on
deposits as high as the rates paid by certain of its competitors and, when
believed to be appropriate, supplements deposits with less expensive
alternative sources of funds.
Statements of Cash Flows. During the six months ended June 30, 1999, and
1998, respectively, the Company experienced positive cash flows from operating
activities and financing activities, and negative cash flows from investing
activities.
Cash flows from operating activities for the periods covered by the
Statements of Cash Flows have been primarily related to origination and sale
of loans held-for-sale, adjustments in deferred assets, credits and other
liabilities, the provision for loan losses and losses on foreclosed assets,
depreciation, sale of foreclosed assets and the amortization of deferred loan
origination fees and discounts (premiums) on loans and investments, all of
which are non-cash or non-operating adjustments to operating cash flows. As a
result, net income adjusted for non-cash and non-operating items was the
primary source of cash flows from operating activities during the six months
ended June 30, 1999 and 1998, while originations of loans held-for-sale, net
of proceeds from sales of loans held-for-sale was the primary use of cash
flows from operating activities during the six months ended June 30, 1998.
Operating activities provided cash flows of $14.8 million during the six
months ended June 30, 1999 and $5.8 million during the six months ended June
30, 1998.
During the six months ended June 30, 1999 and 1998, respectively,
investing activities used cash of $59.0 million and $37.5 million primarily
due to the net increase in available-for-sale and held-to-maturity securities
and the net increase of loans.
<PAGE> 21
Changes in cash flows from financing activities during the periods
covered by the Statements of Cash Flows are due to changes in deposits after
interest credited, changes in FHLBank advances, changes in securities sold
under repurchase agreements and changes in short-term borrowings, as well as
purchases of treasury stock and dividend payments to stockholders. Financing
activities provided $40.2 million in cash during the six months ended June 30,
1999 and $38.3 million in cash during the six months ended June 30, 1998.
Financing activities in the future are expected to primarily include changes
in deposits, securities sold under repurchase agreements and FHLBank advances.
Dividends. During the six months ended June 30, 1999, the Company
declared and paid dividends of $.25 per share, or 29% of net income, compared
to dividends declared and paid during the six months ended June 30, 1998 of
$.235 per share, or 25% of net income. The Board of Directors meets regularly
to consider the level and the timing of dividend payments.
Common Stock Repurchases. The Company has been in various buy-back
programs since May 1990. During the six months ended June 30, 1999, the
Company repurchased 260,440 shares of its common stock at an average price of
$24.08 per share and reissued 44,969 shares of treasury stock at an average
price of $5.52 per share to cover stock option exercises. During the six
months ended June 30, 1998, the Company repurchased 115,894 shares of its
common stock at an average price of $25.34 per share and reissued 11,480 shares
of treasury stock at an average price of $5.80 per share to cover stock option
exercises.
Management intends to continue its stock buy-back programs as long as
repurchasing the stock contributes to the overall growth of shareholder value.
The number of shares of stock that will be repurchased and the price that will
be paid is the result of many factors, several of which are outside of the
control of the Company. The primary factors, however, are the number of
shares available in the market from sellers at any given time, availability of
funds to purchase the shares and the price of the stock within the market as
determined by the market.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant and its subsidiaries are involved as plaintiff or defendant
in various legal actions arising in the normal course of their business.
While the ultimate outcome of the various legal proceedings involving the
Registrant and its subsidiaries cannot be predicted with certainty, it is the
opinion of management, after consultation with legal counsel, that these legal
actions currently are not material to the Registrant.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Common Stockholders
None.
<PAGE> 22
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
See the attached exhibit 11, Statement re computation of earnings per
share.
See the attached exhibit 27, Financial Data Schedule.
b) Reports on Form 8-K
None.
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Great Southern Bancorp, Inc.
Registrant
Date: August 13, 1999 /s/ William V. Turner
--------------------------
William V. Turner
Chairman of the Board,
President and Chief
Executive Officer
Date: August 13, 1999 /s/ Don M. Gibson
--------------------------
Don M. Gibson,
Executive Vice President and
Chief Financial Officer
<PAGE> 24
Exhibit Index
-------------
Exhibit
No. Description
- ------- -----------
11 Statement Re Computation of Earnings Per Share
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
<PAGE> 25
<TABLE>
<CAPTION>
Exhibit 11- Statement Re Computation of Earnings Per Share
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Average shares outstanding 7,619,578 7,995,491 7,688,277 7,991,784
========= ========= ========= =========
Net income $3,225,893 $3,600,406 $6,627,600 $6,964,001
========= ========= ========= =========
Per share amount $0.43 $0.45 $0.87 $0.87
==== ==== ==== ====
Diluted:
Average shares outstanding 7,619,578 7,995,491 7,688,277 7,991,784
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 101,976 143,904 101,976 151,510
--------- --------- --------- ---------
Diluted shares 7,721,554 8,139,395 7,790,253 8,143,294
========= ========= ========= =========
Net income $3,225,893 $3,600,406 $6,627,600 $6,964,001
========= ========= ========= =========
Per share amount $0.42 $0.44 $0.86 $0.86
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Income filed as
part of the quarterly report on Form 10-Q and is qualified in its entirety by
reference to such quarterly report on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,038
<INT-BEARING-DEPOSITS> 1,540
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,185
<INVESTMENTS-CARRYING> 34,590
<INVESTMENTS-MARKET> 34,531
<LOANS> 730,806
<ALLOWANCE> 17,215
<TOTAL-ASSETS> 884,076
<DEPOSITS> 603,120
<SHORT-TERM> 94,589
<LIABILITIES-OTHER> 11,634
<LONG-TERM> 107,804
0
0
<COMMON> 123
<OTHER-SE> 66,807
<TOTAL-LIABILITIES-AND-EQUITY> 884,076
<INTEREST-LOAN> 30,310
<INTEREST-INVEST> 1,847
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,157
<INTEREST-DEPOSIT> 11,941
<INTEREST-EXPENSE> 16,419
<INTEREST-INCOME-NET> 15,737
<LOAN-LOSSES> 1,150
<SECURITIES-GAINS> 268
<EXPENSE-OTHER> 12,292
<INCOME-PRETAX> 9,994
<INCOME-PRE-EXTRAORDINARY> 9,994
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,673
<EPS-BASIC> .87
<EPS-DILUTED> .86
<YIELD-ACTUAL> 3.99
<LOANS-NON> 9,951
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,403
<ALLOWANCE-OPEN> 16,928
<CHARGE-OFFS> 2,160
<RECOVERIES> 1,297
<ALLOWANCE-CLOSE> 17,215
<ALLOWANCE-DOMESTIC> 17,215
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
